Brazil to extend tax breaks as growth, elections eyed

SAO PAULO (Reuters) - Brazil will extend payroll tax breaks to 14 new sectors starting in 2014, the latest in an offensive by President Dilma Rousseff’s government to keep businesses hiring and strengthen her re-election chances next year.

Brazil's President Dilma Rousseff speaks with reporters during breakfast at the Planalto Palace in Brasilia December 27, 2012. Picture taken December 27, 2012. REUTERS/Ueslei Marcelino

In a decree published late on Thursday, the government said it will eliminate payroll taxes for construction, engineering, railway and sea transportation companies. Instead those companies will pay between 1 percent and 2 percent of their gross revenue.

Since last year, Rousseff has extended payroll tax breaks to dozens of industries, such as carmakers and other durable goods manufacturers, in an effort to revive an economy that is struggling to regain the red-hot growth rates that made it an emerging market star over the last decade.

The latest stimulus measures suggest the government is worried about economic growth in 2014, when Rousseff will seek re-election on the leftist Workers’ Party ticket, some economists say.

“This is one of the first signals that the government is worried about 2014,” said Gustavo Mendonça, an economist with Saga Capital in Rio de Janeiro. “The government is looking ahead and seeing that 2014 may not present as robust growth as it had expected before, and it is looking at the political consideration of that as well.”

Rousseff has remained immensely popular half way through her term in office despite a sharp slowdown of the Brazilian economy, which grew only 0.9 percent in 2012, and steadily mounting inflation pressure.

Most Brazilians have been willing to shrug that off as long as unemployment remains at a record low and real wages continue to rise - both of which require businesses to keep hiring, or at least put off firing - based on a perception that the economic outlook is improving.

Part of that includes measures such as tax breaks, intended to show Brazilian businesses that the government is behind them.

Industrial output shrank more than expected in February, suggesting a long-expected rebound in the struggling sector has yet to take place, and some economists are starting to bet the economy as a whole will expand less than 3 percent in 2013.

Finance Minister Guido Mantega said the new tax breaks will help bolster investment, which has been the Achilles heel of Latin America’s largest economy.

“This reduction in taxes is positive for the economy because it lowers costs and makes Brazilian companies more competitive,” Mantega told reporters on Friday in Sao Paulo. He added that the new tax breaks will cost the government 5.4 billion reais in tax revenues next year.

In the decree, the government said it will also reduce taxes on compensation to be paid to electricity companies.

Last year, Rousseff’s government enacted legislation to cut power rates by renegotiating the terms of electricity concessions. Companies that declined to accept sharply lower government-mandated rates had the option of giving up their concessions in exchange for compensation.

The government will also pay billions of dollars to companies that signed new concession deals to compensate for their non-amortized investment.